April 4 (Bloomberg) -- In Australia, where high-frequency
trading firms are half as pervasive as in the U.S., the head of
the biggest stock exchange has a message for Americans who would
rein them in: forget it.

“The way the U.S. market structure has been set up creates
serious problems,” Elmer Funke Kupper, the chief executive
officer of Sydney-based ASX Ltd., told Bloomberg News on the
sidelines of a conference March 24. Efforts to rectify that are
“very late and unlikely to succeed,” he said.

Advantages that are hard to replicate in the U.S. help
Funke Kupper curb speed traders. Australia restricts alternative
exchanges, solidifying ASX’s near-monopoly and reducing high-frequency arbitrage. By contrast, American trading is spread
across more than 50 venues. ASX doesn’t offer payments to
traders for orders, unlike in the U.S., where a system of fees
and rebates known as maker-taker helps keep HFT in business.

“Australia has been increasing the vigilance in HFT
regulations especially in regards to transparency, but they had
the advantage of learning lessons from challenges the U.S. has
already experienced,” Danielle Tierney, Boston-based analyst at
Aite Group LLC, said in a phone interview yesterday. “They also
have much smaller volume, and far fewer complications in their
market structure than the U.S. does.”

Trading attributable to the strategies at the center of
Michael Lewis’s new book hovers around 25 percent of volume in
Australia, compared with about 50 percent in the U.S., according
to estimates from Tierney. Another proxy for high-frequency
trading, the amount of buy and sell requests that go unfilled,
is about half as high in Australia as in America.

Price Discrepancies

High-frequency trading is the catch-all term for software-driven strategies that employ superfast computers to capture
price discrepancies by posting and canceling orders at intervals
measured in thousands and even millionths of seconds.

Whether it can be tamed in the U.S. or not, regulators are
looking for ways to try. New York Attorney General Eric
Schneiderman opened a probe into whether U.S. stock exchanges
give the fastest firms improper advantages. Federal agents are
investigating whether HFTs break U.S. laws by acting on
nonpublic information to gain an edge over competitors.

Debate about whether exchanges are fair has raged all week
after Lewis said in “Flash Boys” that the U.S. stock markets
are rigged, enriching high-frequency traders. The fragmentation
of U.S. trading and the maker-taker system of charging investors
for trades while paying brokers helps HFT thrive, he wrote.

Market Share

The Australian equity landscape is less dispersed. ASX
accounted for 86 percent of on-exchange trading in the past 12
months, with the remaining 14 percent through the No. 2 market
run by Chi-X Australia Pty. The Nasdaq Stock Market is the
biggest U.S. exchange with about 17 percent of volume in March,
according to data compiled by Bloomberg. The New York Stock
Exchange and NYSE Arca are the only two other exchanges that had
at least 10 percent during that period.

Australia has restricted some trading in dark pools,
private venues that don’t publicly display prices, tempering
competition for ASX. The Australian Securities and Investments
Commission in May introduced a rule banning such trades unless
they beat the best public quote, leading to a 40 percent
reduction in non-block transactions from the prior two months.
The rule only applies to below block-size trades.

Off-exchange volume makes up almost 40 percent of U.S.
trading. In Australia, the government curbs have helped keep the
comparable figure at 24 percent, according to data compiled by
ASX.

Exploitable Differences

“The more fragmented the market is, the more opportunities
there are for HFT who look for differences across that market to
exploit,” said Carole Comerton-Forde, a finance professor at
the University of Melbourne who studied market structure across
Australia, Europe and the U.S. after completing a PhD in 2000.

The regulator says Australia’s $1.4 trillion cash-equity
market would not benefit investors or the companies which listed
on the exchanges by having a maker-taker system similar to the
U.S.

“We believe there is sufficient evidence to conclude that
maker–taker models, where the market operator pays a rebate, do
not promote market quality or market integrity,” the ASIC said
in a March 2013 study.

Neither Funke Kupper nor Lewis are the first to criticize
the protocol. Chris Concannon, president of one of the biggest
high-frequency firms, New York-based Virtu Financial Inc., told
Bloomberg News in December that regulators should consider an
across-the-board reduction in trading fees to curb the use of
dark pools.

Needless Trading

Jeff Sprecher, the CEO of IntercontinentalExchange Group
Inc., which bought the NYSE in November, says maker-taker harms
the market. He’s met with the U.S. Securities and Exchange
Commission to encourage a ban on the practice. Lewis contends in
“Flash Boys,” that maker-taker encourages needless trading.

“I don’t like maker-taker,” Sprecher said in October.
“You shouldn’t pay people to trade.”

Another sign of Australia’s success in limiting HFT is that
fewer orders go unfilled due to a charge on orders. High-frequency strategies are usually defined by the use of computers
to post and cancel orders in times measured in thousandths and
even millionths of seconds. In the six years through the end of
2013, the average order-to-trade ratio in Australia was 4.2,
less than half that of the NYSE, according to data compiled by
Sydney-based research firm Capital Markets CRC Ltd.

‘Almost Irrelevant’

“HFT in this part of the world is almost irrelevant,”
said Michael Aitken, a professor at Capital Markets CRC. “In
many cases it’s just too expensive and you can see the low
order-to-trade ratios. It shows regulatory decisions have
impact.”

With all the market structure difference between the U.S.
and Australia, Funke Kupper says the U.S. is fighting a losing
battle after Schneiderman opened the investigation into whether
U.S. stock exchanges provide high-frequency traders with
improper advantages.

“I don’t believe the people operating in that market are
doing anything illegal,” Funke Kupper said. “So you have to
change the structure not go after people. You’ve created an
environment where that becomes a self-perpetuating model.”